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Comment by bitmage | Hacker News Reader

This is missing an important point - if you buy, you are stuck there until you can sell it again. That loss of flexibility represents a significant cost of its own.

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Also it involves concentrating your financial risk in one highly leveraged asset.

And therefore pre-supposes a stability that people are not currently finding -- whether in property values or in their life circumstances and those of their communities (U.S. centric perspective).

Yes and No. You typically are only risking your equity when you buy a house (which, with a 30 year mortgage, is basically just your down payment).

It might start that way, but 15 years down the line you will have invested a lot in that house. There is an ideal rate of home ownership relative to economic growth unfortunately the US is well pass the optimum with far to many people owning when it's a poor economic choice for them to do so.

PS: What's missing from much of this analysis is you can have positive home equity but the transaction costs of buying and selling a home put you into the red.

Ah, no no no no no!!!

House prices can and do drop 40-60% from a peak. If you got a 95% mortage, you can really be hammered.

In most states, mortgages are non-recourse loans, meaning that in effect the bank has to eat any losses, if you choose to play hardball. If they foreclose on the house and repossess it, the loan is considered settled, and they can't attempt to collect the difference, even if the house is worth less than the value of the loan was.

Pfft. I thought that was just California. One would think that that would have encouraged them to underwrite a little better.,, And who the fuck would rate any tranche of non-recourse loans AAA?

How long does it stay on your credit history (officially)?

7 years is the typical number I've seen for how long things stay on one's credit history.

... or until you can rent it out, which in many markets is a fairly easy thing to do.

Yes, in many markets it is fairly easy. But in most it is not. In fact, anywhere you are, it's quite a hassle to find a good tenant, find new ones when the previous occupier leaves, fix the house etc...

That's what property management companies are for.

For 8-10% monthly fee. =)

Only 5% last time I talked to one in the US (and 5.5% for my place in Australia).

"Only" 5%? That's more than the average margin on owning real estate. Meaning, that 5% makes the difference between a profit and a loss on owning the building. 5% is a lot when you look at the cost of the capital that is required.

(as a side note, I'm hard pressed to believe that for 5% everything is included (taxes, fees, ...) and that they do everything for you for that money. I'd pay 9% here in Europe, including tax, and for that money they'd put ads in the papers/internet, show the building to tenants, check if payments are made and put a lawyer on it when they're not (but I'd still have to pay the lawyer) and take the phone when something needs fixing. I'd still have to find, send and pay a repairman myself).

how would you quantify opportunity lost due to loss of flexibility?

I live in a city in Canada that has a bit of a lacklustre tech scene. Unfortunately, I bought a condo 2 years ago.

Because of the size of the down payment I made (small), and the condo market right now (not awesome), I can't sell without taking a loss until probably about 2014. I also probably can't rent without taking a loss.

I'd like to move - but at the moment, short of foreclosure, there's no way to get this condo off my hands so that I'm free to move again without taking a significant-enough (~$15k) hit to make it cost prohibitive.

Are there more opportunities in other cities? Definitely. But because of my current living situation, I'm not flexible enough to take advantage of them.

How would your loss compare to two years' worth of rent for a similar apartment? I pay much more rent than $15k in two years, and that's in Montreal where rent is fairly cheap.

Curious: which city in Canada?

Assuming you are looking at a 30 year mortgage, you could look at the spread of the 30 year USD gov't bond over the overnight rate (3.52% http://www.bloomberg.com/markets/rates-bonds/government-bond...).

From wikipedia: Liquidity premium theory

The Liquidity Premium Theory is an offshoot of the Pure Expectations Theory. The Liquidity Premium Theory asserts that long-term interest rates not only reflect investors’ assumptions about future interest rates but also include a premium for holding long-term bonds (investors prefer short term bonds to long term bonds), called the term premium or the liquidity premium. This premium compensates investors for the added risk of having their money tied up for a longer period, including the greater price uncertainty. Because of the term premium, long-term bond yields tend to be higher than short-term yields, and the yield curve slopes upward. Long term yields are also higher not just because of the liquidity premium, but also because of the risk premium added by the risk of default from holding a security over the long term. The market expectations hypothesis is combined with the liquidity premium theory:

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